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In my article, Why Top Performing Advisors are Exiting the Business, I outlined the fundamental changes taking place in every aspect of how financial advisors operate. Perhaps nowhere is the change we’re seeing greater than in how successful advisors are attracting new clients – and in particular the collapse in the role that referrals play in bringing new clients on board.

Historically, referrals were the primary way that advisors attracted new clients. And those referrals came relatively easily, as a reward for doing a good job for clients. But times have changed. When I talk to advisors today, I hear a different story, as many talk about referrals “drying up.” And industry data backs this up.

In his article, The Death of Referral Marketing for Financial Advisors, Michael Kitces wrote about a FPA research study on the source of AUM growth. The key chart is below, showing that in 2015 client referrals represented less than 2% of AUM and when it came to increasing assets were significantly less important than the combined assets from a variety of other business development techniques.

This raises three fundamental questions for advisors:

  1. What’s led to the slump in referrals – and is this change temporary or permanent?
  2. What are the implications for the approach that you should take in your approach to referrals?
  3. What does this mean in terms of the broader strategy on attracting clients?

Today, I’ll tackle the first two questions on referrals – and deal with the issue of your broader strategy on attracting clients in the New Year.